Hey, good morning, everyone. Thanks for joining us for the MSA Safety presentation. I'm Rob Mason, the senior analyst at Baird that covers advanced industrial equipment, which includes MSA Safety. For those less familiar, just real quick, MSA Safety is a pure-play provider of sophisticated safety equipment globally, and the market leader across a large portion of the product segments that it participates. The company's known as an innovation and technology leader in personal safety, which we think helps drive and sustain the market leadership that it sees in the premium segment of the sophisticated safety market. I'm very pleased to have Lee McChesney, the Chief Financial Officer with MSA, with us today. So Lee's gonna start off with a few opening comments, and then we'll move to Q&A. And again, reminder, send your questions up if you have any, and we'll work those in.
Thanks, Lee.
Perfect. Thank you, Rob. Good morning, everyone. Thanks for spending a few minutes with us. Thank you to Rob and Baird for inviting us again this year. Couple of comments. As Rob said, I'll walk us through a couple of slides, but then we'll quickly get to Q&A. Before I do that, I also do want to remind everyone, we did have an Investor Day a couple of years ago. It seemed like a couple of years ago, a couple of weeks ago. And all that content's available online as well if you want to dive into a whole bunch of things for four hours of all things MSA. So with that said, just a reminder, if we get the... There we go.
Certainly, just our normal cautionary statements about forward-looking statements, things I got to keep in mind as well. All right, so let's just spend a minute on MSA. So number one, as Rob said, you know, safety is all we do. You know, in this format, I'll give the shorter version of what we're about. I mean, in simple terms, we wanna make sure that when people go to work each day, they come home safe. That is what fuels the company. It's this month, this week, actually, is our 110th anniversary, and that same mission that was created then is the same mission we follow today, and it really drives the organization. It's really our competitive advantage.
It enables people to stay. They just like working for MSA. It worked for me, it's worked for many of my colleagues. We have, you know, really low attrition rates, and oftentimes, when you talk to someone at MSA, they haven't worked there for a couple of years, they've worked there for, measured in decades. And it gives us. Again, we're just continually focused on that mission and how we serve it. So just a couple numbers to give everyone baseline, if you're not that familiar with the story. So, about $1.008 billion in sales last LTM. As I mentioned, we're focused on keeping people safe.
How we do that is fueled by innovation, and so we spend close to $80 million a year to fuel that vision of keeping people safe, coming up with the best-in-class products in the businesses that we've chosen to focus on. It gives us a pretty robust, for an industrial, 37% vitality rate, and again, just our continued focus on how do we keep people safe and really serving the market. It's a you know good profitability business, 48%. You know, we'll talk about the business system often oftentimes.
We've built this capability, really, just how do we drive this business in a more consistent way, whether it's classic productivity, whether it's working, what we do with work on our base cost, efficiency, driving, making sure we have good capacity with pricing to offset inflation. All that comes through in this, this healthy gross margin that we've spoken about continuing to improve as we look forward here as well. Our leverage is always been a strength of who we are. Today, it sits at 1.0. We shared recently, you know, a mindset that we wanna keep it in the 1.5-2.5 zone, which means certainly we are, we're in a good position today, have a lot of optionality to continue to add to the portfolio.
Get great, great organic trajectory, but also, we've, we have done a nice job of enhancing that with selective M&A, and certainly, our mindset is we can do that and probably even more just based on the state of the business today. And then finally, from a, you know, from a shareholder perspective, 54 years of an increasing dividend. We just announced our most recent, which was an 8.5% increase. And then we also, just the board just recently authorized a $200 million share buyback, which, you know, we were in the market with recently, and that was to make sure we, we offset the, the dilution from employee compensation programs and things like that. The business, you can see we, we have two, you know, reported P&Ls externally. So we have our Americas business.
I mean, you can imagine there, going from Canada all the way down to South America. And then really everything else fits into international. So three business segments. You know, leading in terms of size is fire services. So this is a business that really everything you can imagine a firefighter wears, from their head down to their boots, and then, you know, different gear they use to fight a fire. So the largest product being what we call the SCBA, the self-contained breathing apparatus. And that's, you know, this is a business that we've, you know, kind of what we're known for. Again, it's a good example of what we've done organically, and then we've advanced through some of the really nice, smart acquisitions to broaden that play. Very sticky business.
There's, you know, pretty, pretty consistent support for firefighters around the world, really, no matter what's happening in the economy. Detection is certainly a growing part of the portfolio, so this is really, in simple terms, two categories. This is what we call fixed detection, so this is what it gets attached to in a building, but basically it's looking through the air, looking for contaminants that could lead to, you know, people breathing the wrong thing or some type of explosion risk. So, you know, different types of technologies in play there. It's a business that we've been in for decades, and again, one that we've enhanced with M&A over the past decade as well. And then you have portable as well, and it uses the same sensor technology, but these are what workers wear.
You know, so you could imagine them wearing this in at-risk environments, which could also extend into where they go to do their role. You imagine in small, you know, environments, you know, limited airspace and things like that. It's a business that, one of our distinct, ways we go to market, again, from an innovation perspective, is we make our, all of our sensors. So we come up with those sensors, and we manufacture those sensors. We're not, we're not, sourcing it from other places, and our sensors are known for, in many cases, being the fastest, at detecting, which is pretty, pretty important when you think about the mission and what's going on in the detection space. And then finally, industrial PPE. You know, a business that certainly we've been in for, for years.
You know, in head protection, certainly a leading share there, really in all things except for residential construction. You'll see our hard hats, and then fall protection's been a big focus for us, particularly for the last decade. We've almost doubled our share there, but still a lot of growth opportunities for us as well there. So, you know, a little bit of the numbers. Maybe just with this conference in mind and technology innovation, as I said, innovation is how we service that mission of keeping people safe. So over... You know, we're very much a long-term mindset to what we do in investments here. You know, we're investing, in many cases, to come up with products that we could sell for decades.
So, you know, there's quite a bit of technology, or tech stack, you can think of, we built up across this here. But there's an evolution going on. You know, so historically, in the safety space, you think about what people wear to keep them safe. But what is evolving is, how do we, again, scan an environment, whether, you know, whether it's through detection technology, whether through software solutions, to prevent these incidents from ever occurring? So again, imagine today that, you know, a lot of this stuff can be brought to life through a connected capability, and you can look over a job site and see a data pattern that before was never noticed.
And again, we're gonna have—we're still gonna have the PPE, but now we can have solutions that really help detect these incidents from ever occurring. So certainly, that's been a focus. We talk here also about just, you know, behavior-based safety, which is a really evolving element that's going on in safety as well, that we spend a good amount of time in here. We're just, again, using this data to understand how people are using their gear or how they're doing their job to once again, really prevent these events from ever occurring. We have spent. A lot of this has been enabled by the Connected Worker strategy. So for the last five years, we've been building out a cloud-based software platform that we can leverage across all of our portfolio today.
So today, for example, that portable detector, you can buy with an ALTAIR io 4. That's fully connected through the cellular network, cloud-based, it comes back to what we call Grid Software, and, you know, today, instead of just someone checking something out in the morning and being off on a job site, their manager knows where they are. They can see if there's any incidents. You know, again, this has been an investment we made over years to bring to life. In the industrial space, it's really resonating well quickly, because not only is it a great safety solution, but you're giving them productivity, you're giving them record keeping, which is certainly important traits that's going on in the safety space.
With all that said, you know, certainly just the importance of safety across the world, I think, has never been at a higher level than it is today. So whether that was already going on before 'cause it was important to a company, or you think about what we've all learned about just the importance of keeping people safe during the pandemic, you just see more dollars being spent on each worker. You know, I spend time interacting with lots of different companies here, you know, oftentimes you hear people talking about their safety track record and what they're doing to improve it. As you know, you don't improve safety track records without really investing in new ideas. So all that comes to life, and it's certainly a nice match for who we are.
The last thing I'll just do for today is, again, we had our Investor Day a couple of weeks ago. We did put out 2028 targets. That's something we had not done before, and we thought it was important as we've really made a nice acceleration in the performance of the business over the last decade, to also show really the confidence in where we are today and where we think we can go, certainly over the next five years. You know, we have leading share really in almost everything we do, and those businesses are in a really nice place as we look forward here as well. So, certainly, we're reiterating here, the mid-single-digit growth. We've oftentimes talked about a 30%-40% incremental. We've consistently delivered that.
Certainly, this operating margin and EPS target are really kind of squarely in the center of that, and those are the organic growth targets. As I mentioned a little bit earlier, we certainly have a strong balance sheet and a lot of capacity. When you look at our returns over the last several years, it has been enhanced by M&A, and we've actually done better than these levels at an all-in level. So again, we wanted to make sure everyone knew we still had a lot of confidence in where we're going here, and certainly, that's the foundation for these targets as we look forward. Perfect, and with that said, back to Rob.
Just dive in here. Maybe just start real quickly on, on this year. MSA doesn't formally guide per se-
Mm-hmm
... but you've endorsed a mid-single digit, at least a mid-single digit-
Yeah
... growth top line. Reiterated that as, you know, recently as a couple of weeks ago at the Investor Day. Just, and you started off, I should say, in the first quarter in that zone.
Mm-hmm.
But as you think about the rest of the year playing out, there were some divergences in the product lines, growth rates. You go up against some tough comps from last year in detection.
Yeah.
You know, how are we thinking we deliver that mid-single-digit growth relative to the different product categories?
Yeah. Thank you, Rob. So yeah, good question. So in the first quarter, just to kind of get everyone baselined, we did have, you know, mid-single-digit growth. We did have incrementals actually even higher than the 30%-40% target level and really good EPS growth. But to Rob's point, we did have a scenario where in one quarter, which can happen with our business, 'cause there can be some lumpiness with orders and things like that, where the fire service is actually in the teens, and the detection business and industrial PPE were slightly negative. You know, part of that is we were dealing with a very significant comp.
But also, you know, we did have a couple of little things on the supply chain we had to battle, and again, in long cycle business, you know, we're just running the business. I always say to people, "Don't overreact to one quarter for us.
You really should measure us kind of over a six-month time period." So I think, you know, one of the things I tried to say when we released the earnings is, "Hey, I think you'll see that quickly come back to what we're looking for for the year, when, when you step back and look at the first two quarters, where, you know, the fire business will be squarely in the, the mid-single digit." It might be a little bit higher, you know, given what happens with our Air Force, second order we're waiting on, and, certainly, detection will turn again positive. You know, one of the things that was also, you know, strong in the first quarter, we actually had really good order trends there. Again, it was just getting it all out in final form.
And then, certainly, Industrial PPE has continued to be better than I think we all expected. I think that speaks to maybe some of the secular trends I just mentioned, but I also think things like infrastructure and things like that are gonna play out well. So we're sitting here through May. The order pattern is, you know, as we laid out to give confidence in that mid-single-digit growth, is everything we are expecting to see. So we still feel like we're in a good place. We're still optimistic with some of the large orders we have out there for the back half of the year. And, you know, again, this is a year you gotta be a bit more cautious, but we're still very confident in that outlook for the year.
How are, you know, the industrial PPE business in particular?
Mm-hmm.
-to the extent, you know, that's probably performed better than you would think, relative to this historical correlation to PMIs and-
Yeah, sure
... industrial production and the like. So are there some discrete factors, or I should maybe rather, end market exposures? You mentioned infrastructure, but just, help us understand what comprises that business today and maybe why it's not as cyclical as-
Yeah
... its name may imply.
Yeah, that's true. So well, I think, I think a couple of things for us. You're, you're right, the industrial PPE business for us for the last year and a half, I think it's been better than we all thought. You know, it's, it's slowed, but it's still trending usually to being a net positive. And so I think for us, you know, we certainly serve a wide mix of the marketplace. We're not really overly indexed to any one place, so I think that helps, you know. Oftentimes, when you see our business, again, it's not your typical cyclicality you see in an industrial, again, partly because of the other segments, but also even in the industrial PPE business, it's a pretty wide swath of what we do.
With that said, I do think you have some other trends that I think many of us are seeing. You know, certainly the infrastructure spend, you know, things to go on in terms of strengthening the grid and things like that. Those are positive elements, I think, that are helping our business. And then, you know, this focus on, you know, the employment level is still... unemployment level is still quite low, and that's certainly when you think about gear that people wear, if there was to be a slowdown there in terms of higher unemployment levels, but just we haven't seen that.
I like to say, I think we all kind of have expectations of what's happened in past cycles, and so far, it just hasn't played out to that extreme in that area there.
Yeah.
Yeah, so.
You made mention, Air Force, that's, you know, a large SCBA win that dates back to last year-
Mm-hmm
... that you started filling on. It's not unusual to have larger orders at MSA.
Mm-hmm.
This one seems a little larger than typical.
Good size.
How are you thinking about delivering that, you know, over the next 6-12 months?
Mm-hmm
... and, you know, to the extent it's, you know, will it create a tough comp for you?
Mm-hmm.
you know, at some point in the future, do you see there's, you know-
Yeah
... other large orders that-
Sure
... would offset that?
So, no, to your point, it's not every day we get a potentially up to $70 million of orders from one customer. It's actually unusual for us in some ways to get something that large, so other than maybe some of these Pillar City wins in the fire business and things like that. Just to give a recap, so we've already realized about $35 million of that volume. We started shipping that in the third quarter of last year, and we just completed the first span of that in the first quarter of this year. That was really about half of what we're expecting tied to this.
This, again, imagine they wanna have the same solution at all bases, so that, you know, as people move around, there's one way to do this, and we are optimistic, you know, that, well, the second order will come as well. The one we don't control with some of these large orders is the exact timing. You know, so our best estimate is, you know, a good portion of this will happen in the second half of this year. And obviously, you know, we don't control those factors. Some of those could be geopolitical and things like that.
But here's what we do know is, we're confident in the order, and it will come, and I think, you know, it's one of the things, again, with our business is, you know, we're gonna serve the market, and, you know, from time to time, there can be a little noise from one quarter to the next. But again, you typically step back, you look at over a six-month or larger basis, we consistently are who we are.
Mm-hmm.
Now, to your last point of... Sure, in the end, there's potentially up to $70 million of volume running through our fire business. That's, you know, that's, that's a good size. You know, so that could be a, a challenging comp.... but also I say, you know, look at the rest of the business, you know, there's a good counter to that. So, you know, part of our outlook, for the next five years is based on the foundation of having that entire order. So sure, there might be a, a small period of time where you have a tough, tough comp, but otherwise, we're still very confident in this mid-single-digit growth outlook for the next five years.
Well, well, maybe let's go there. We'll zoom out-
Mm-hmm
... of 2024, and-
Mm-hmm
... you know, kind of referencing the target long-term 2028 targets you put out, you walked through in some detail, what makes up that 3%-5% across-
Mm
... the businesses, but what stood out was detection-
Mm
... you know, is where you expect the highest growth and, and growth above the market as well, I should say. So 5%-7% growth for perspective is kind of what MSA is targeting, you know, a point or two above the market. One, I guess, why is your growth gonna be better there?
Mm-hmm.
What drives that market?
Yeah, so it's a good question. So, I guess the first place I would talk to is, you know, those numbers that are out there are based on our experience. We've actually grown at that level or more over the last last decade. So some of it goes into the factors I mentioned in the, in the kickoff here. You know, there's just- there's a move towards, again, preventing incidents from occurring. So, you know, adding detection solutions at sites or, or bringing forward even, you know, enhanced solutions to that. So in, you think about the portable space today, and that's just- it's a- it's growing more than average because you see this, this mindset that this solution is better than what we had before.
It certainly comes at a higher price point, but it also comes with more feature set. So we just think, like, for example, that's going through a, you know, heightened acceleration and growth, even more than the numbers you quoted, so really helping pull that segment forward here. And then, you know, oftentimes, again, you go back to the fixed business. You know, there are some good sizable projects going on around the world, and, you know, we have a leading position there, in the fixed with our solutions. And, you know, we continue to, I'll say, do a nice job navigating that market perspective and continuing to win share as well.
Yeah.
So, again, it's... We're well-positioned in that business, and also, when you look at the, the, within the secular trends of safety, there's more of a move towards that area. So again, that's why it's been a focus, and it will be going forward. The last piece I would just mention, too, is there's still an opportunity for further consolidation in that space. So, you know, we have done some acquisitions. Our most recent was Bacharach. Again, we were in the HVAC space before, but they were, you know, another frankly, leading platform, and they're very similar to what MSA, a leading platform, you know, known for innovation, and, you know, it's really, you know, a nice further diversification of the business as well. That business is off and rolling for us.
We had to navigate through the supply chain like a lot of groups do, and now it's been posting, you know, again, above-average growth for us.
Could you give us a sense, you have leading market shares in many of your categories-
Mm-hmm
... but, including, gas detection-
Yeah
... what's the relative share, make up there among the larger players?
So-
How concentrated is it?
Yeah, so, yeah, I'll give you a higher level version of that. So in, if we go through the businesses, so in fire services, you know, today, in terms of the products that we've, you know, what we where we focus, it's primarily ourselves, it's 3M Scott. You know, this is primarily talking to SCBA and then Dräger-
Mm-hmm
... in Europe. Certainly, the history is today that certainly, 3M and us have the largest share, we'll say that. If you go into... I'll jump all the way to industrial PPE, you know, primarily, today, again, leading position, head protection and fall protection, we're focused on growing there. We've been consistently growing double digits, but you're still competing with against Honeywell and 3M in that space, primarily for us around the world. And then, in the detection space, you know, for the group here today, you know, a little bit of a different mix between fixed and portables, but you're getting into, in some cases, you know, Honeywell or Dräger, Emerson, Fortive, you know, again, depending on the product lines there.
Okay.
It's, you know, generally, it's a good group of companies that do, you know, I think run the business as well, and then if you can lead with innovation, you do a good job of protecting your share and then maybe, you know, gaining some share as well.
And-
That's sort of our mindset.
Right. Right, you mentioned refrigeration, or HVACR. Again, traditionally, I think the investors think of that as more of an oil and gas-centric business.
Mm-hmm.
But there's clearly other detection elements, even decarbonization.
Yeah
... themes running through that business as well.
Yeah, I mean, I'll give a little color because I've talked about this diversification of the business. We continue to focus on diversifying the business more and more. Certainly, we have what we are known for historically. In the detection space, specifically, Rob, you're right, we did a lot in the energy space, yes, or the origins of the group, but, you know, again, you think about the trends going on with safety, you know, there's still, you know, these other segments that we're, you know, we have many of our solutions work in as well. So, certainly, we talked about the HVAC, but, you know, utilities, you know, waste, clean, you know, type of fluid solutions, all those need some type of solution.
You get into electronics fabrication or chips, you know, there's some element out there, and then there could, you know, there's frankly other groups out there that maybe do a specific product that could be an interesting addition to us over time.
Yep, yep. Just real quick on the, on the fire services business, you've had a lot of success with some of these, you call them pillar cities, wins over the last several years. How are you seeing the opportunity set, for those type of opportunities going forward?
Yeah, sure. So, just a little bit of a color on that here. So, yeah, we've had some good work, good progress in the fire business, particularly when we talk about SCBA, so again, the breathing apparatus. So in 2014, we launched really what was a leading first time the G1. So it was, you know, to meet a new specification that was required, and we've had a really good run with that. And that product, again, approaching 10 years today, but it's continuing to evolve, and we, you know, when we've made those improvements, we've also made them backwards compatible, so it's good for all. We've had good response to that around the world.
So, you know, a Pillar City to us is a large department that goes through a pretty sophisticated evaluation and, you know, can lead to certainly a good commercial win for us, but it can also help influence departments around them. So, you know, recent wins we had were in London, so that was a department that had a competitive product. We went through a, you know, pretty extensive process and won the London Fire Brigade, and, you know, since then, there's been several other decisions made across the U.K., and that certainly helped us win a good share of those. And again, that was a place we had very low market share. You know, with the evolution of our G1 in Europe, it's specifically an M1, which is an evolution of the G1 for the European market.
And then, you know, similar path has helped out in the L.A. Like, you know, we have corridors in the U.S. where we have historically had strong share. You know, the West is a nice growth opportunity for us, so it's been nice to win there and then obviously see other departments come. As we look forward, you know, there's certainly a good number coming, and you don't get London's and L.A.'s every day. You know, Pillar City could be a $3 million in some cities and help, you know, around that. You know, for this year, it's probably more in the, I'll say, the small and mid-sized groups to come, but there are some pretty significant departments that will come over the next couple of years as well.
And again, just, you know, given the share we have, you know, those are certainly, in many cases, opportunities we're gonna compete with, and we're optimistic what we can do, just based on what we've done historically.
Yep, yep. And clearly, I think, London's a great example where you did use innovative technology to help secure that win. So maybe shifting the discussion-
Mm-hmm
... a little bit, you put the number up there, 37%-
Mm-hmm
Vitality target is a high number for an industrial company. Just help us understand where R&D has been prioritized here over the last, I don't know, 12, 24 months.
Okay.
I don't know how new product development cycle runs for you, but just-
Sure
where the priority's been.
Yes, it's a good question. So again, just the baseline, so we've been spending about 4.5% on R&D. It's fundamental to what we do. If you look over the last five years, think about the different things we managed, we continued to invest even in, you know, challenged economic times, 'cause it's just it's core to who we are. With that said, it's not equal for all. We're very focused on, you know, linking it to our strategy, and you saw highlights that last couple of weeks in our Investor Day. So, you certainly things like detection, you know, advancements in, in the fire side, they'll get a higher piece of that, and then you have some of these other product lines.
But like Fall Protection, we've invested significantly into it, but then there's, there is a good long run with it as well. You know, so there's elements like that, and then, you know, some of these longer things that we talked about earlier in terms of, you know, the Connected Worker, things like that. That's definitely a multiyear investment. And, you know, that's already paying dividends for us today, but I think it will pay more, and we continue to add feature sets to make the solution even a better match for our end users.
Because in the end, you know, the products we come up with are really being fueled by what our end users are telling us, 'cause we're consistently engaging with the end users to really help them improve, you know, what they're looking for in terms of solutions.
Yep, very good. And there's probably a design for cost element there, too, and this, maybe this is rapid fire, given how much-
Mm
... time we have left. But, how should we think within that, say, 30%-40% incremental margin range?
Mm-hmm.
You know, the driver, is that more gross margin or OpEx-
Yeah
-average?
I think it's a good balance. Yeah, so we've talked about 30-50 basis points of operating margin improvement each year, in addition, 30-50 basis points of working capital efficiency each year. I think it's what you've seen in the past. It's a nice balance of gross margin and SG&A, and I think that will be the path going forward here as well.
Yeah. Yeah, I did want to work in one question-
Mm-hmm
... that we have from the audience, which gets into capital allocation.
Yep.
You've obviously, you know, starting to lean more into the M&A opportunity set, still remaining disciplined.
Mm-hmm.
You did remove some legacy liabilities early last year. How does that influence, you know, kind of available cash flow on a go-forward basis?
It's a good thing, and I know I'm sensitive to time. You know, balance sheet has never been stronger for us. We talk about really one third going into organic growth, focusing on customer engagement. Third, going to shareholders, which I mentioned earlier, the focus on paying an increase in dividend and you know, doing the share buybacks. And then, you're right, we have certainly a good third available for inorganic growth, and just based on you know, where the balance sheet stands today, the available debt capacity, you know, we've never had more dollars to put back into inorganic growth. That's what we're focused on doing, and 'cause we, again, we've shown really a nice ability to do that historically.
Excellent. Well, we need to pull up there. We're out of time, but-